This February, we attended CONEXPO-CON/AGG and unveiled our 44th annual Wells Fargo Construction Industry Forecast. These two events usually signal the start of a robust spring. In fact, this year’s National Optimism Quotient was a solid 99, just one point shy of strongly optimistic.
How much the world has changed in just a few weeks.
Small signs of optimism amid widespread cancellations, furloughs
Like you, the health and safety of our coworkers, families, friends, and communities remains our top priority. And while construction continues as an “essential business,” daily operations for industry contractors and dealers are still far from business as usual.
According to the Associated General Contractors of America’s latest research*:
- Two-thirds of construction companies saw at least one project halted or cancelled in April or May.
- The industry lost 975,000 jobs in April; 18 percent of companies anticipate or have already furloughed or terminated staff in May.
- One-quarter experienced project delays from a lack of personal protective equipment for employees.
- One-quarter experienced project delays due to a shortage of construction materials, parts, equipment or craftworkers.
On a more positive note, the association also reports:
- 21 percent of companies began new work as a result of the pandemic, including medical, highway, and utility projects.
- 16 percent added new employees in the first week of May; 18 percent anticipate needing to add more staff in the next four weeks.
While these small positive signs are heartening, it remains difficult to predict exactly when full recovery will occur.
One thing to remember is that the industry has survived (and even thrived) despite previous adverse cycles. With the record period of economic expansion over the past decade, we do see most construction contractors and dealers entering this COVID-19 downturn in a much stronger position compared to the 2008 crisis. In fact, many clients and industry leaders we’ve spoken with actually have a pipeline of orders and projects, which hopefully indicates an accelerated recovery.
Until then, we offer some guidance for managing through difficult times.
5 tips to manage your firm’s finances
As you navigate these uncharted conditions, consider these recommendations to help optimize your finances.
- Make a plan. It sounds obvious, but in a fluid situation, spur-of-the-moment decisions (or doing nothing) often overshadow strategic thinking. Taking a few hours to outline your short- and long-term options will help you regain control and operate efficiently. Even a 30-day plan will help you and your staff move forward in alignment.
- Communicate openly with your bank. At Wells Fargo, we value each of our clients and the strong, trusted relationships we’ve developed over the years. If financial difficulties arise, we encourage you to leverage your banker’s experience, as well as the full resources available within the bank. Frequent and open communication by all sides helps us work together to identify the best short and long-term solutions.
- Prioritize your income and expenses. The more you can quantify your own situation, the better positioned you’ll be to make necessary changes or seek outside assistance. Review your obligations for payroll, rent, accounts payable and bank debt. Do the same with your outstanding and projected receivables.With limited cash flow, which payments will take priority? No one enjoys these tough decisions, but taking a hard look in advance gives you more time to reach out to property owners, suppliers, banks and others to negotiate extensions or deferrals.
- Understand your options. After two rounds of federal funding, the Paycheck Protection Program (PPP) quickly reached its ceiling. The Federal Reserve’s much-anticipated Main Street Lending Program may be an option for businesses with revenues below $5 billion and under 15,000 employees; we are awaiting full details.
Outside these government-funded initiatives, even well-qualified borrowers are seeing higher pricing and caps on lending thresholds. That means it’s smart to consider other emergency sources of capital. In a crisis, it’s time to get creative.
- Senior leaders and investors who have taken personal distributions may consider reinvesting some or all of that cash back into the business.
- Your firm may benefit from selling an asset, particularly one that might go unused and depreciate quickly during a downturn.
- A third option is securing additional funds with free and clear collateral.
- Think long term. At this point, none of us have a crystal ball to predict the future. It is safe to assume that whatever comes next will be an entirely new form of “normal.” While many options are still on the table, including a federal stimulus package for infrastructure projects, it’s advisable to plan your go-forward strategy without depending on new programs. This helps ensure you won’t count on funding and fall short. Review your capital and cash flow, then make a “plan B” that stretches well past your hoped-for recovery date.
With the rapid pace of change in these dynamic market conditions, it’s critical to inform your decisions with up-to-date information. Wells Fargo can be a valued resource in this capacity, with proprietary economic research, forecasts, rates and even tips we’re hearing from your peers across the construction industry. We encourage you to reach out as needed.
*As of May 28, 2020
The information contained herein is general in nature and not intended to provide you with specific advice or recommendations. Contact your attorney, accountant, tax or other professional advisor with regard to your individual situation.
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